The Main Intrigue of Vladimir Putin's Negotiations with Xi Jinping: Will the Long-Awaited "Power of Siberia-2" Gas Pipeline Project Be Signed?
The technical aspects are agreed upon: it is known where the "Power of Siberia-2" gas pipeline will run and how it will be constructed. What remains is to sign the commercial contract, where complexities arise. However, experts are confident that it will be signed, whether at the current meeting between the two presidents of Russia and China or at an economic forum, for instance, in St. Petersburg.
Experts' confidence stems from China's recent experience of a real threat of energy resource shortages, which was previously only hypothetical. The main advantage of Russian gas is the reliability of its supply thanks to the pipeline system.
Moscow and Beijing have generally reached an understanding on the key parameters of the "Power of Siberia-2" gas pipeline project, stated Dmitry Peskov, the press secretary of the President of Russia. The nations only need to iron out a few remaining details, he added. According to him, the agreements reached represent a significant achievement in bilateral relations.
Deputy Prime Minister Alexander Novak expressed even greater optimism in an interview with the news agency "Vesti": final agreements on specific contracts are already nearing completion. "As for political decisions, agreements at the leaders' level were reached earlier, and now technical work and finalization of the contracts are underway," he said.
"I believe the intrigue persists. Everything regarding the construction of the pipeline and its route was legally committed during Vladimir Putin's previous visit to China in a binding memorandum. We just need to sign the commercial contract. The issue here is purely that the parties cannot agree on the gas price. And it's still unclear if there has been any movement towards a compromise on this issue," says Igor Yushkov, an expert from the National Energy Security Fund (NESF) and the Financial University under the Government of the Russian Federation.
However, the chances of signing have significantly increased for one simple reason. The entire situation in the Hormuz Strait is pushing China towards this. "China has openly demonstrated that the United States is using energy as a means to exert pressure on China. First, Venezuela began implementing reforms favorable to the United States, which in response have gradually lifted sanctions on the country. As a result, China lost access to Venezuelan oil at favorable prices. Now China has also lost Iranian oil at preferential prices due to the Americans who instigated a conflict. In other words, the US is cutting off China's access to its most advantageous energy resource suppliers," reflects the NESF expert.
A similar pressure is also occurring with LNG supplies to China. Initially, there were sanctions against Russian LNG projects. Now, China has lost Qatari LNG due to disruptions in the Hormuz Strait and damage to infrastructure in Qatar.
"Last year's trade conflict with the US also played a role, which is still unresolved and led to China's effective refusal to purchase American LNG," says Sergey Tereshkin, General Director of Open Oil Market.
Risks also exist with Australia, which is among the world's largest LNG producers. "Earlier, China had temporarily refused to purchase Australian coal due to disagreements surrounding the origins of the COVID-19 pandemic, later replacing Australian raw materials with supplies from Mongolia. Risks of similar diplomatic disagreements remain, so it is crucial for China to hedge against potential LNG supply shortages in the coming years," Tereshkin explains.
"China understands that the US will continue to choke off energy supplies, stifling its development. Therefore, purchasing hydrocarbons from Russia is one of the few options that could save it. The main advantage of 'Power of Siberia-2' is the reliability of supply. This factor is now gaining particular significance for China."
– says Yushkov.
Overall, geopolitical factors are leaning towards the realization of the "Power of Siberia-2" project, agrees Tereshkin.
"As China continues to develop, its confrontation with the US will intensify. Therefore, it makes sense for China to expedite the commercial contract for Russian gas, as the pipeline will take at least five years to construct, followed by several more years to reach its design capacity of 50 billion cubic meters. Thus, reaching a capacity of 50 billion cubic meters per year is a prospect for the mid-2030s. Everyone understands that pressure from the US on China will significantly increase by that time," says Yushkov.
The issue of gas pricing in the contract, likely to be signed for a duration of 10 years, is crucial for both parties, as it determines the profitability of the project. It is evident that Russia wants more, while China as the buyer aims to pay less. Yushkov reminds us that when discussing another pipeline route—not through Mongolia—Beijing sought similarly low prices for gas as it pays for Turkmen gas, which has been flowing through the "Central Asia-China" pipeline for 16 years. This is because both Turkmen and Russian pipeline gas would arrive in the same region of China, competing against each other. Russia had to alter the pipeline route to avoid competition with Turkmen gas.
"Prices for Turkmen gas are low because China originally invested in the extraction projects and in the construction of these pipelines. It is now recouping its investments in field development and pipeline construction," the expert clarifies. Russia, on the other hand, is both building the pipeline and developing the fields. However, in the case of "Power of Siberia-2", the resource base is already established (unlike "Power of Siberia-1"), but this merely indicates that investments were made previously.
The second nuance that is likely being discussed between the parties is what to link the gas price to. "What type of price indexing will be used—oil-based, as seen in 'Power of Siberia-1', which is linked to oil and petroleum product prices in Asian ports? Or will it be linked to exchange gas prices? However, the experience of the first 'Power of Siberia' shows that oil indexing is convenient for China. First, it is more stable; second, it is more advantageous. If the price were indexed to exchange gas prices, the situation would be worse for China," explains Igor Yushkov.
For Russia, this agreement is equally important as it represents additional revenue from the export of 50 billion cubic meters of gas. Europe is preparing to completely abandon Russian gas by 2027, making it impossible to rely on this buyer. Therefore, expanding cooperation with another buyer is a significant goal.
However, it is clear that "Power of Siberia-2" cannot fully compensate for the losses in the European market.
"In 2021, we supplied about 150 billion cubic meters of pipeline gas to the European market. This equals three 'Power of Siberia-2' projects in volume. These are certainly not mutually exclusive export pathways."
– says Yushkov.
"In terms of volumes, Russia will have 100-150 billion cubic meters of gas freed from the European direction, plus Gazprom can produce another 100 billion cubic meters from West Siberian fields. Thus, a total of approximately 200-250 billion cubic meters of gas will be available. Therefore, we can easily build two 'Power of Siberia-2' pipelines and restore all previous volumes of supply to Europe. This is not a problem," concludes Yushkov.
Source: Vzglyad
